Gold jewellery
It's not just about a crumbling greenback any more.
The price of gold continues to hit all-time highs as unnerved investors seek a safe alternative to currencies clobbered by Europe's financial crisis and growing worries about sovereign debt.
Gold prices long moved in an inverse relationship with the U.S. dollar, climbing when the greenback fell, as it did for years during the last decade. But in recent weeks, gold has broken free of that link, blazing a trail of its own as investors flee the euro and other currencies. The euro has dropped 12 per cent against the U.S. dollar this year.
Normally, an updraft in the U.S. dollar would weigh on gold prices. But gold just keeps going higher, shooting up $22.80 (U.S.) or nearly 2 per cent Wednesday to about $1,243.10 an ounce, after hitting a record intraday high of $1,247.70. It's risen more than $150 an ounce from just a few months ago, before serious concerns about Europe's financial state set in.
"Gold is going up because there is a real concern about monetary debasement," said Martin Murenbeeld, an economist with Dundee Wealth.
The metal is gaining independence as a broader investor base buys in.
Experts also point to the growth of gold-based exchange-traded funds.
And as sovereign debt rises in many countries worldwide, some central banks, including those in India and China, are also adding gold to their reserves.
Once investors such as central banks buy gold, they rarely sell it, said Peter Munk, founder and chairman of Barrick Gold Corp., the world's largest gold producer.
"A new layer of people are joining the committed buyers of gold because they lost confidence," Mr. Munk said in an interview.
European countries are now trying to work though their debt problems by taking on more debt, he noted.
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Gold bubble?:
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"People just can't believe that we can solve major debt issues by adding more debt," Mr. Munk said.
While gold companies benefit from the rising price, Mr. Munk said he shudders at the thought of gold prices flying out of control if the financial crisis deepens.
"I just hope there's a limit to this lack of confidence, because we don't want the panic to spread," Mr. Munk said. "We don't want to live in countries where confidence in our currencies, confidence in our fiscal management, is so undermined that we all have to buy more and more gold."
Gold has been long viewed as a hedge on inflation, which is what's also driving its recent rise, according to Bart Melek, a global commodities strategist at BMO Nesbitt Burns.
"We have a debt problem and investors believe that down the road there will be temptation to print money to balance the books," Mr. Melek said. "It's a flight to safety."
While gold has hit a record high, gold companies are still waiting for their stocks to catch up to highs reached in late 2008, when the global financial crisis sent many of their stock prices soaring.
Gold stocks have been hurt by competition from exchange-traded funds, as well as rising capital costs and competition from other commodities that have recovered since the recession.
However, since the European debt issue blew up last week, gold companies such as Barrick, Kinross Gold Corp, Goldcorp Inc. and Agnico-Eagle Mines Ltd. have all seen their stocks rise steadily.
Some believe the trend is still up from here.
"We are currently in the middle of a long-term bull market for gold," said Sean Boyd, chief executive officer at Agnico-Eagle.
Key dates in gold trading
August, 1971: Then-U.S. President Richard Nixon takes the U.S. dollar off the gold standard, which had been in place with minor modifications since the Bretton Woods Agreement of 1944 fixed the conversion rate for one Troy ounce of gold at $35 (U.S.).
March, 1973: Most major countries adopt floating-exchange-rate system.
January, 1980: Gold hits record high of $850 an ounce. High inflation - because of strong oil prices, Soviet intervention in Afghanistan and the impact of the Iranian revolution - prompts investors to move into the metal.
August, 1999: Gold falls to a low of $251.70 on worries about central banks reducing reserves of gold bullion and mining companies selling gold in forward markets to protect against falling prices.
November, 2005: Spot gold breaches $500 for the first time since December, 1987.
May 12, 2006: Gold prices peak at $730 an ounce, reflecting the weak dollar, firm oil prices and political tensions over Iran's nuclear ambitions.
March 17, 2008: Spot gold hits an all-time high of $1,030.80 an ounce.
Sept. 17, 2008: Spot gold rises by nearly $90 an ounce, a record one-day gain, as investors seek safety amid turmoil on the equity markets.
Feb. 20, 2009: Gold climbs back to a near-peak of $1,005.40 as major economies face recession and equity markets tumble.
Dec. 3, 2009: Gold hits $1,226.10 an ounce, with dollar weakness and expectations for central banks to diversify reserves into gold driving prices higher.
May 11, 2010: Gold reaches a fresh record high above $1,230 an ounce amid fears over the contagion of debt issues in the euro zone.
Reuters